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Israel reinvents its startup nation status

Two years since my last trip to Israel, it was great to see Eli again at Ben Gurion Airport in Tel Aviv at the end of December. Eli is a former Israel Defense Forces (IDF) paratrooper, now taxi driver, who had driven me around Silicon Wadi on previous business trips. Eli is wise — his advice an unparalleled window into what makes Israelis tick. “The Israeli army,” he says, “is the only one where the general sits in the front seat, next to the driver.”

I can’t think of a better way to summarize “power distance,” one of Professor Geert Hofstede’s six dimensions in his national culture model. Israel enjoys a very low — if not the lowest — “power distance” score, meaning equal rights, accessible superiors and a management that empowers, are not just essential but expected.

Uncertainty avoidance and short-term orientation are the other two dimensions of the 6-D model in which Israel’s national culture stands out. Former Israeli President Shimon Peres is often quoted as having said that the essence of the Israeli condition is “to be dissatisfied… and always feel we have to fix things.”

These cultural factors are without question at the heart of the country’s success as the original startup nation. Ten years after Dan Senor and Saul Singer wrote the book that coined that phrase, the Israeli startup scene remains incredibly vibrant.

Original sources of success remain

Estimates vary on the number of startups there, but there is no denying the energy implied by the numbers. Dun and Bradstreet counted 4,750 high-tech startups in Israel in 2016. Separately, Startup Nation Central reported 700 new startups founded in 2017. Israeli startups generated $4.5 billion of funding in 2016.

This sheer momentum is what attracts global companies to Israel.

Then you have the bigger companies arriving to open up research and development (R&D) shops. More than 350 have established a presence in the country. IBM was an early pioneer, arriving in 1972. Microsoft came in the early 1990s. Google first established a presence in Tel Aviv in 2006, and 6 years later launched its startup incubator. The list today includes AT&T, Cisco, Citi and J.P.Morgan. As a result, Israel’s civilian R&D investment as share of gross domestic product (GDP), at 4.3 percent in 2016, is the highest in the Organisation for Economic Co-operation and Development (OECD) and has been in pole position consistently for 14 of the preceding 15 years.

An attraction of this magnitude was not built on culture alone. Rather, it has been encouraged by an active economic policy. This included tax cuts in the mid-1980s, as well as Yozma, a government initiative started in 1993 to shape the country’s venture capital sector.

Diversification across sectors

Much has been made of Israel’s tech gurus being talent-spotted and trained during military service. Unsurprisingly, many startups operate in spaces adjacent to defense, such as cyber security (CyberArk and Check Point), aviation and drones (Airobotics and Flytrex), artificial intelligence (AI) and robotics, and transport and navigation (Mobileye and Waze).

Other sectors have also benefited from the ecosystem of talent, funding and culture:

More than 1,400 Israeli companies operate in the life sciences domain, including 450 digital health companies. It is likely no coincidence that the first president of Israel, Dr. Chaim Weizmann, a chemist by training, is considered one of the founders of biotechnology.

Water and agricultural technology is at the heart of many startup business plans.

There were 475 active FinTech startups at the end of 2017, up from 159 in 2012, concentrating 20 percent of the $4.5 billion of funding generated in 2016, with unicorn Payoneer perhaps the best known.

And fashion technology is in on the act, with a startup called Browzwear providing 3D tools for fashion retailers the world over.

Geostrategic orientation toward the East

On top of these solid foundations, Asian economic powers have entered the Israeli startup community. The numbers are small at present: According to IVC Research Center, Chinese firms accounted for no more than 8 percent of all Israeli tech exits between 2015 and 2017. But there are unmistakable signs of interest and commitment to investing in Israel’s tech.

Huawei, the Chinese telecom supplier, is one of the 350 multinationals with an R&D center in Israel. In 2016 it bought two specialized Israeli firms, Toga Networks and HexaTier. Not to be left behind, Japan’s Sony purchased Altair Semiconductors in the same year.

2018 was perhaps a turning point in intensity for Sino-Israeli tech collaboration. Jack Ma, chairman of Alibaba, visited the country twice. In parallel, the e-commerce firm confirmed two investments. One was in Nexar, an Israeli AI driving safety app. The other investment was in data warehouse provider SQream.

It is important to remember that Israel is involved in the Chinese government’s One Belt One Road project, providing geographically strategic and stable access to the Mediterranean and markets beyond. Will the flow of investment from China stop? I’d say that is unlikely.

And what does Eli — in his taxi taking me to my hotel in the middle of the night — make of all this?

Wise as ever, he has a word of caution for Chinese investors: “Becoming a millionaire in Tel Aviv is easy,” he chuckled, “All you have to do is to start as a billionaire.”

Vincent Rousselet is founder and MD of V Rousselet & Associates. With more than 20 years of strategic and operational marketing experience, predominantly in IT and telecommunications, he is an experienced global marketer and strategist who has worked with some of the world’s most recognizable organizations and brands in Europe, the United States, Africa and Asia. Vincent is passionate about customers, who must be at the heart of strategy and transformation.